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What is a traditional IRA?

Nicolas StrautBy Nicolas StrautPublished 7 min read

Key takeaways

  • The traditional IRA contribution limit is $7,500, or $8,600 if you're 50 or older, and there's no income cap on who can contribute, only on who can deduct.
  • A traditional IRA is a retirement account you fund yourself: the contribution may be deductible going in, and every dollar comes out taxed as ordinary income.
  • The deduction phase-out applies only if you or your spouse is covered by a workplace retirement plan. If neither of you is, the full contribution is deductible no matter what you earn.
In this article

A traditional IRA is a retirement account you fund yourself, where the money grows without annual tax and withdrawals are taxed as ordinary income. You can contribute $7,500, or $8,600 at 50 or older.1 Whether you can deduct that contribution depends on whether you or your spouse have a workplace retirement plan.

What is a traditional IRA?

A traditional IRA is an individual retirement arrangement under IRC §408, opened by you rather than by an employer, and it's the default IRA most people mean when they just say "IRA." Unlike a 401(k), nobody sponsors it: you pick the custodian and fund it yourself.

The account itself is a wrapper, not an investment, and it can hold essentially anything a taxable brokerage account can.

How a traditional IRA works

A traditional IRA works by taking money you put in, potentially deducting it from your taxable income, letting it grow with no annual tax on dividends, interest or gains, and taxing every dollar that eventually comes out as ordinary income. The trade is straightforward: you're deferring tax, not avoiding it.

  • You need taxable compensation to contribute: wages, salary, or self-employment earnings. Pension income, dividends, rental income and Social Security don't count.
  • There's no age cap on contributing since the SECURE Act removed the old 70½ restriction.
  • The limit is $7,500, or $8,600 if you're 50 or older, combined across every IRA you own, traditional and Roth together.
  • A working spouse can fund an account for a spouse with little or no income of their own. What is a Roth IRA covers the spousal IRA rules in full.

Traditional IRA vs Roth IRA

The difference between a traditional IRA and a Roth IRA is when you pay the tax, not how much you're allowed to save. A traditional IRA deducts your contribution now and taxes the withdrawal later. A Roth does the reverse.

Scroll horizontally to see more columns.
 Traditional IRARoth IRA
Deduction in the year you contributeYes, if you qualifyNever
Tax on qualified withdrawalsOrdinary incomeNone
Income limit on contributingNoneYes, by MAGI
Lifetime required minimum distributionsYesNo

Which one wins depends on a guess about your own tax rate: higher now, or higher when you withdraw. Roth vs traditional IRA works through the break-even math in full.

Are traditional IRA contributions tax deductible?

Whether a traditional IRA contribution is deductible comes down to one thing, and it isn't your income by itself. It's whether you or your spouse is covered by a workplace retirement plan. If neither of you is covered, the contribution is fully deductible no matter what you earn.

How to tell if you are covered by a plan at work

The IRS calls this being an active participant, and there's a literal indicator: box 13 of your W-2, labeled "Retirement plan." If it's checked, you're covered.

  • Defined contribution plan, such as a 401(k): you're covered if contributions or forfeitures were allocated to your account for the plan year. Simply being eligible isn't enough.
  • Defined benefit plan, such as a pension: you're covered if you're eligible to participate, whether or not you did anything.

Being an active participant for any part of the plan year taints the entire tax year, so two months in a 401(k) before you left a job counts.2 Your spouse's coverage matters too, and it triggers a different, much higher phase-out range.

Traditional IRA deduction income limits

Scroll horizontally to see more columns.
SituationFull deduction belowPhase-out rangeNo deduction at or above
Single or head of household, covered by a plan$81,000$81,000 – $91,000$91,000
Married filing jointly, contributor covered$129,000$129,000 – $149,000$149,000
Married filing jointly, contributor not covered, spouse is$242,000$242,000 – $252,000$252,000
Neither spouse covered by a planNo limit--

The row people miss most is the third one.3 If your spouse has a 401(k) and you don't, you get a far higher threshold, not a straight exemption.

How to work out a partial deduction

Working out a partial deduction is arithmetic almost nobody publishes: figure out how far your income sits into the phase-out band, express that as a share of the band's width, and reduce your contribution limit by that share.

Take a single filer covered by a plan with a MAGI of $86,000. That's $5,000 into a $10,000-wide band, or half of it, so half the $7,500 limit is removed: $7,500 minus $3,750 leaves a deductible contribution of $3,750, rounded to the nearest $10 where needed.4

The reduction can never take your limit below $200 unless it would bring it all the way to zero. A single filer at $90,900 is $9,900 into that same $10,000 band and would otherwise deduct just $75, but the floor raises that to $200. It's the most counterintuitive rule in the whole computation.

What happens when you cannot deduct a contribution

When you can't deduct a contribution, you can still make it. What you get instead is basis: after-tax money inside a pre-tax account, which you have to report on Form 8606 for the year you make it.

Basis carries forward from one year's Form 8606 to the next, and that chain proves you already paid tax on those dollars. If the chain breaks, the IRS treats the whole withdrawal as taxable and you pay tax twice on the same money, the single most expensive quiet mistake in this category.

  • Basis doesn't come out of an IRA on its own. If you ever convert to a Roth, it comes out proportionally along with pre-tax money. Backdoor Roth IRA owns the pro-rata rule and the full Form 8606 walkthrough.
  • An inherited traditional IRA isn't combined with your own for basis or pro-rata purposes. It gets its own Form 8606, so inheriting a large IRA doesn't poison a backdoor Roth for you.

Traditional IRA withdrawal rules

Traditional IRA withdrawals are taxed as ordinary income, and before 59½ they generally carry an additional 10% tax on top.

Gains inside the account also come out as ordinary income, not at long-term capital gains rates, a quiet cost most pages skip. Tax deferral is not tax conversion.

When you can withdraw without the 10% penalty

You can withdraw from a traditional IRA without the 10% penalty in several situations, most tied to age, hardship or a specific life event.

Scroll horizontally to see more columns.
ExceptionLimitApplies to IRAs?
Age 59½-Yes
First-time home purchase$10,000 lifetimeYes
Qualified higher educationNo dollar capYes
Unreimbursed medical expensesAbove 7.5% of AGIYes
Disability, death-Yes
Emergency personal expense$1,000, one per calendar yearYes
Domestic abuse victim$10,500Yes
Terminal illnessNo dollar capYes
Separation from service at 55, the "Rule of 55"-No, 401(k) only

Two corrections worth knowing: the medical threshold is 7.5% of AGI, not the 10% many pages still list, and the Rule of 55 doesn't apply to IRAs at all, only to 401(k)s. Waiving the penalty doesn't waive the income tax: every dollar that comes out is still taxed as ordinary income.

When required minimum distributions start

Scroll horizontally to see more columns.
BornRequired beginning age
July 1, 1949 – December 31, 195072
1951 – 195873
1959Unresolved, see below
1960 or later75

The 1959 cohort is genuinely unresolved. The statute at IRC §401(a)(9)(C)(v) is internally inconsistent, since someone born in 1959 satisfies both the clause that reads as age 73 and the clause that reads as age 75, and the regulation slot at 26 CFR §1.401(a)(9)-2(b)(2)(v) remains formally reserved.5 A proposed rule would set it at 73, but that proposal isn't final, so nobody in this cohort has settled guidance yet.

  • The missed-RMD penalty is 25% of the shortfall, reduced to 10% if you correct it within the correction window. It was 50% before SECURE 2.0.
  • The RMD calculator walks through your own required beginning date and amount.

When a traditional IRA is the wrong choice

A traditional IRA is the wrong choice in a few specific situations, and it's a section a brokerage page won't write.

You're early career in the 10% or 12% bracket

Deducting at 12% only to withdraw at a higher rate later inverts the trade. Roth vs traditional IRA works through when that flips.

You can't deduct it and have no conversion plan

A nondeductible contribution with no intention of converting is the worst of the three outcomes: no deduction now, ordinary income on the growth later, and a Form 8606 obligation for decades. If you're above the deduction threshold, the first question to answer is whether a Roth or a backdoor Roth is available to you instead.

Your balance is large enough that RMDs will create their own problem

Required distributions raise your taxable income in your seventies, which can raise the taxable share of Social Security and push your Medicare premiums into a higher bracket.Roth conversion owns both of those consequences in full.

Rolling an old 401(k) into a traditional IRA is usually straightforward, but it's worth knowing what you give up: the Rule of 55, and a bigger pro-rata denominator if you ever want a backdoor Roth.

Frequently asked questions about traditional IRAs

Can I contribute to both a 401(k) and a traditional IRA in the same year?

You can contribute to both a 401(k) and a traditional IRA in the same year, since the two limits are entirely separate. What your 401(k) does is make you an active participant, which triggers the deduction phase-out on your IRA contribution. You can still contribute, you just may not be able to deduct it.

What is the deadline for a traditional IRA contribution?

The deadline is the April filing date for the year the contribution counts toward, not December 31. You designate the tax year when you fund the account, so a contribution made early the following year can still count for the prior tax year if you label it that way.

Is tax withheld from a traditional IRA withdrawal?

Withholding on a traditional IRA withdrawal defaults to 10% for federal tax unless you elect a different amount or opt out. That default is a payment on account, not the tax itself. If your marginal rate is higher, 10% won't cover the bill and the shortfall shows up when you file.

Do I have to file Form 8606 every year?

Form 8606 is required for any year you make a nondeductible contribution, take a distribution from an IRA that has basis, or convert. Years with only deductible contributions and no distributions don't need one. Keeping every filing you do make is the part that actually matters.

Can I roll an old 401(k) into a traditional IRA?

Rolling a 401(k) into a traditional IRA is permitted and usually done as a direct trustee-to-trustee transfer. Two trade-offs are worth knowing first: you give up the Rule of 55, and the balance joins the pro-rata calculation if you later want a backdoor Roth.

Nicolas Straut

Nicolas Straut

Personal finance writer, former Forbes contributor and This Week in Fintech writer

Figures come from IRS Notice 2025-67 and are updated annually. The required beginning age for anyone born in 1959 is not settled in final regulations.

Tweed provides educational estimates, not financial advice. Nicolas Straut is not a financial advisor. Confirm your situation with a qualified professional.

Sources

  1. https://www.irs.gov/newsroom/401k-limit-increases-to-24500-for-2026-ira-limit-increases-to-7500
  2. https://www.law.cornell.edu/uscode/text/26/219
  3. https://www.irs.gov/retirement-plans/are-you-covered-by-an-employers-retirement-plan
  4. https://www.irs.gov/publications/p590a
  5. https://www.law.cornell.edu/cfr/text/26/1.401(a)(9)-2